DAILY NATION Tuesday April 21, 2015 finance DISPUTE» LENDER HAS ACCUSED REGULATOR OF DISCRIMINATORY PRACTICES Goldenberg ghosts return to haunt the Central Bank A bank has sued the regulator seeking to be refunded more than Sh5 billion, which the CBK deducted as penalties for breach of contract related to the scam The Central Bank of Kenya is entangled in a court case with Oriental Commercial Bank over penalties related to the Goldenberg scandal. FILE | NATION smart business 13 ECONOMY » BY JOSHUA MASINDE Economy must maintain over 6pc growth to sustain public debt: report Kenya’s economy needs to register a persistent growth of over 6 per cent if it is to sustain its public debt over the next five years. This is according to a new report, which further indicates that growth prospects are being undermined by the prevailing insecurity in the country. Already, the performance of the country’s major foreign exchange earners such as tea and tourism is declining. This is projected to further dampen growth prospects that had been estimated to stand at over 6 per cent in the next three years. A report by Renaissance Capital analysts re- leased last Friday says the government’s heavy investment in infrastructure projects in energy, rail and roads development are geared towards raising economic growth. These huge investments and the devolution process are already exerting a lot of pressure of the country’s financial resources. “Constitutionally, Kenya’s 47 counties must be BY ABIUD OCHIENG’ @abiudawiti aawiti@ke.nationmedia.com K could not be traced. In the court papers, the enya’s biggest financial scam, Goldenberg, has returned to haunt the Central Bank of Kenya after a local bank revived a case in which it is demanding over Sh5 billion from the regulator. In the application, Oriental Commercial Bank has sued the Central Bank of Kenya (CBK) seeking to be refunded the money which comprises the principal amount of Sh122,975,244 and interests accrued since June 23, 1993. The regulator took the money as penalties after Oriental failed to deliver on a contract it had entered with CBK. The deal, which later became part of what was known as the Goldenberg scandal, was for sale of foreign currency by the bank to the CBK. The bank, formerly operat- ing as Delphis Bank Ltd, on April 26, 1993 entered into a contract in which it would sell $19 million to CBK at the rate of Sh59.5804 per US Dollar. The bank however failed to deliver the agreed amount to CBK’s account at the Federal Reserve Bank in New York, saying it had deposited the money at the American Express Bank, in London. This was not what the parties had agreed upon and the money bank claims the regulator was discriminatory because it (Oriental) was charged a higher penalty compared to other banks. The lender says that while others were charged an interest at the rate of 3.35 per cent, the regulator charged it at 65 per cent. “CBK as a regulator had an obligation to act equitably to all stakeholders in the banking industry, to act in compliance with the law, written contracts and with the constitution. CBK’s actions were in breach of its fiduciary obligations as a regulator of the banking industry, and it has become liable for the breaches as a trustee,” Oriental Bank said in their court papers. The CBK had asked the court to dismiss the case saying it was time-barred, having been filed over 16 years later. “Oriental Bank’s claim is premised on penalties we levied against it in 1993. We informed the bank of the penalties the same year. It had been aware of the same for 17 years as at 2010 when through a letter addressed to CBK, it decided the penalties were wrongful. Oriental Bank was simply indolent,” CBK lawyers had argued. But Mr Justice Fred Ochieng, in his ruling, allowed the application on certain aspects while dismissing some of the bank’s points of argument. The judge ruled that Orien- tal Commercial Bank’s claim based on the alleged violation CBK AS A REGULATOR HAD AN OBLIGATION TO ACT EQUITABLY TO ALL STAKEHOLDERS IN THE BANKING INDUSTRY, TO ACT IN COMPLIANCE WITH THE LAW, WRITTEN CONTRACTS AND WITH THE CONSTITUTION” Oriental Commercial Bank 38bn An approximate amount in shilings that Kenyan taxpayers lost in the Goldenberg scandal that started in 1993. 1993 Year when CBK says it notified Delhis Bank over penalties emanating from breach of an agreement between them. of the CBK’s fiduciary duty as a trustee was not time-barred. However, he found that the bank’s claim based on the contract between the parties to the case was time-barred and any claim “which flows directly or by extension, from the said contracts, are equally statutebarred”. CBK terminated the contract on June 21, 1993 after Delphis Bank failed to honour its side of the bargain and penalised the bank for breaching the agreement. CBK said it informed Del- phis Bank of the penalties on September 13, 1993 and that the bank had no objection. It also noted that Delphis Bank was “intimately involved” with Goldenberg International Ltd and its proprietor, Mr Kamlesh Pattni. The Judicial Commission of Inquiry into the Goldenberg Affairs which was constituted by President Mwai Kibaki on February 24, 2003 had in its final report found that Delphis Bank was “part and parcel of, and intricately involved in the fraudulent activities” that led to the Government of Kenya and CBK losing approximately Sh37,463,616,294 to Mr Pattni, and his companies, including the bank. The commission recom- mended both recovery and prosecution of those involved. CBK said its action to levy an interest and penalty charges were lawful because the sums acquired by Delphis Bank were through fraudulent utilization of the regulator’s funds. “On one hand, Oriental Bank enjoyed having its account credited with Sh1,132,027,600 which was equivalent to 19 million US Dollars. This was done on April 26, 1993 and is not disputed by Oriental Bank. CBK on the other hand, had the right to have its foreign currency account at the Federal Reserve Bank in New York, to be credited with 19 million US Dollars. This was not done,” CBK said. Oriental Bank’s claims of discrimination, the regulator said, can therefore not stand because “the Constitution of Kenya, past and present, does not protect alleged rights to proceeds of fraud”. However, Oriental Commer- cial Bank said that based on the findings in the Goldenberg Report made public on February 3, 2006, they discovered that CBK committed illegal, fraudulent and discriminatory acts against them. The acts, Oriental said, amounted to violation of its constitutional rights. “In the said Goldenberg Re- port, it was established that though Oriental Commercial Bank was charged penalty interest at the rate of 65 per cent, other banks with similar contracts were arbitrarily charged by CBK interests at the rate of 3.35 per cent. The report further confirmed that CBK charged other banks penalty interest for periods shorter than those expected,” Oriental Bank said in their court papers. allocated at least 15 per cent of the budget. They are currently getting 30 per cent+ and are pushing for 40-45 per cent. We think Kenya needs to maintain 6 per cent+ growth to sustain public debt at 50 per cent over the medium term,” Renaissance Capital analysts said. Despite the fiscal pressure arising from the devolution of administrative functions and capital injection in infrastructure projects through taxpayers’ funds, the investments are seen as an engine to Kenya’s growth “and we expect it to help propel growth to over 6 per cent in the mid-term (compared to 5.1 per cent per annum on average since 2007. “However, insecurity threatens to undermine growth. It is for this reason that the IMF is likely to downwardly revise its 2015 growth forecast from 6.9 per cent. Tourism, which has been in decline for a few years now, is not likely, in our view, to recover in the short term,” the analysts said. “This is especially negative for the current ac- count as tourism is one of Kenya’s biggest FX earners.” These sentiments are further shared by analysts at Cytonn Investments, who observe that unless insecurity is quickly and aggressively contained, “we are of the opinion that a downward revision of the economic growth forecast for the country from IMF’s prediction of 7 per cent may be imminent”. Any drastic downward revision may put immense pressure on public finances especially regarding financing both external and domestic debt. Last month, the Nairobi Securities Exchange chief executive officer, Geoffrey Odundo projected that Kenya’s debt stock is likely to reach Sh2.9 trillion at the end of 2015 from Sh2.5 trillion currently. Tourism has been hit hard by insecurity. FILE | NATION